objectives of theory

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School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM 123

Professor

Christine Dupont

Semester

Fall

Description

In much of economic theory, it is assumed that a business aims to maximise profits.
In reality, most businesses which are run for “commercial gain” do have profit maximisation as
an important objective – since the shareholders have taken a risk investing in the business and
require a return (profit) to compensate them for their risk.
There are, however, many other potential financial objectives of a business. The table below
summarises three alternative models of business objectives that have attracted popular support:
Sales Maximisation Model (Baumol)
This model argues that businesses try to maximise sales or revenues rather than profits. There are
several possible motives for such an objective:
• Grow or sustain market share
• Ensure survival
• Discourage competitors (particularly new entrants to a market)
• Build the prestige of the senior management – who like to be seen running a large rather than a
particularly profitable business
• Achieve bonuses – if these are based on revenues rather than profits
Management Discretion Model (Williamson)
In this model, Williamson argues that management act to further their own interests – in other
words to achieve person